Jemma and Sally are in partnership. Their capital balances at the end of the accounting period are $200 000 and $150 000 respectively. Jemma decides to make a permanent cash withdrawal from her capital account of $50 000. If it is assumed that they use the fixed capital balances method (method 2), what is the accounting entry to record this transaction?
A) Debit Jemma capital account $50 000; credit profit distribution account $50 000
B) Debit Jemma retained earnings account $50 000; credit profit distribution account $50 000
C) Debit Jemma capital account $50 000; credit bank account $50 000
D) Debit Jemma retained earnings account $50 000; credit bank account $50 000

Question

Quizplus · Accepted Answer

When using the fixed capital balances method, any permanent withdrawals made by a partner are debited to their capital account and credited to the bank account. Therefore, the accounting entry for Jemma's permanent cash withdrawal would be: Debit Jemma capital account $50 000; credit bank account $50 000. Option A and B are incorrect as there is no profit distribution account involved in this transaction. Option D is incorrect as a permanent cash withdrawal would not be debited to retained earnings.

Jemma and Sally Are in Partnership